Strangely enough, etymologists aren't certain. The prevalent theory seems to be that it's from the Welsh pen gwyn, meaning "white head." "But wait," you must ask at this point, "penguins don't have white heads!" True, most penguins' heads are mostly black. However, the name penguin was originally applied to the extinct great auk, which looks remarkably like a penguin even though it lived in arctic waters rather than the antarctic. You may note that the great auk didn't have a white head either! However, it did have a large white patch between the eyes and beak, and this is generally supposed to be the source of the name. Dictionary.com also suggests that the name comes from the great auk's "winter plumage," which perhaps was more white. The American Heritage Dictionary (via Dictionary.com) suggests that white head may have referred to White Head Island, an island near Newfoundland, but it seems unlikely to me that the great auk, which was known in the British Isles, would be named after an island in Canada. Regardless, this theory supposes that penguins were named after their resemblance to the great auk.

On a completely unrelated note, the last great auk in the British Isles appears to have been killed because the locals thought it was a witch.

There is some support for the belief that the word comes from Latin pinguis, meaning "fat": the same root word as for "pinguescence". Penguins do tend to be plump, and it's worth noting that in most other languages, the word for penguin is spelled with an "i" rather than an "e" as the first vowel. But this is not the dominant theory, and the Online Etymology Dictionary asserts that the French and Breton words derive from English rather than directly from Latin.

(Wikipedia)